 Income tax 2021-2022, reporting rental income, expenses and loss as part number one. Get ready to get refunds to the max, diving in to income tax 2021-2022. Most of this information can be found in Publication 527 Residential Rental Property Tax Year 2021 IRS website irs.gov, irs.gov. We're looking at the income tax formula focused on line one income noting we would have another schedule basically an income statement with income and expenses the expenses basically being deductions the net then is what rolls into line one income of the income tax formula and eventually page one of the form 1040 this is the schedule E basically the income statement schedule we're focused on the rental real estate so we're going to be continuing on here reporting rental income expenses and losses figuring the net income or loss for residential rental activity may involve more than just listing the income and deductions on schedule E form 1040 so the rental income gets a little bit confusing you might ask yourself why do I use a schedule E as opposed to a schedule C they're both basically income statement types of schedules the net then rolling in to page one of the form 1040 eventually but you'll note that we had some differences between the schedule C and the schedule E notable differences including like self-employment tax for example on the schedule C oftentimes which may not always be there with the reporting of the rental income you've got the the deductibility of the qualified business income deduction and then on the schedule C which you don't see so much on the schedule E and you might have stuff on the schedule E which includes like passive activity type of rule so there's some differences between them there could be some instances where you're going to actually be using a schedule C when you're dealing with basically real estate situations so there are activities that don't qualify to use schedule E such as when the activity isn't engaged in to make a profit or when you provide substantial services in conjunction with the property so if it's not engaged in for profit then you're talking about property that might not be like a rental type of property it might be more of a a personal property in that instance and if you're talking about property that you provide for a lot of services for as well then it looks like it's leaning more towards a business type of activity that would be like if it was more like a hotel for example where you're providing services for the guests routinely instead of just providing a place of rental on a more passive kind of situation then you would think it's likely that you might have to report that on the schedule C as opposed to the schedule E there are also the limitations that made me to apply if you have a net loss on schedule E so note that the government is going to be skeptical of losses and they're even more skeptical of losses on the schedule E because losses you know the government's your silent partner but they want to take they want to be there when you make income right when you make a loss they don't want to pay you for the loss that you have or allow you to take the loss on other incomes although sometimes you can but you can expect them to be more skeptical there they're even more skeptical with losses with rental income because oftentimes when we engage in rental property we're not in it just to get the rental income but we're also in it to basically have an increase in the value of the property which is a more of a passive kind of activity and so they you can imagine they would be more skeptical that as we're just investing in the property for the property value to hopefully go up over time we're writing off losses for rental losses so they're so they might like limit the amount of losses more stringently on rental property than possibly on other types of businesses like a schedule C type of business so there are two one the limitation based on the amount of investment you have at risk in your rental activity and two the special limits imposed on passive activities so you may also have a gain or loss related to your rental property from a casualty or theft this is considered separately from the income and expense information you report on schedule E so which forms to use then we're using the schedule E or we're using the schedule C or what the basic form reporting residential rental income and expenses is the schedule E so typically if we're thinking about they've got some other property possibly residential rental property we would typically be thinking okay schedule E would be the first form popping into the head as opposed to the schedule E however don't use that schedule to report a not-for-profit activity see not rented for profit later in chapter four so if it's a not-for-profit that's going to stop us we're going to have to do some more research on that and that we'll have to treat that differently there are also other rental situations in which forms other than schedule E would be used schedule E form 1040 if you rent buildings rooms or apartments and provide basic services such as heat and light trash collection etc you normally report your rental income on and expenses on schedule E part one list your total income expenses and depreciation for each rental property basically the income statement be sure to enter the number of fair rental and personal use days on line two so that's going to help to determine whether it's a rental property like full-time rental property or how long it was a rental property if you used it for personal use then it gets a little bit more confusing for the allocation between rental and personal use if you have more than three rental or royalty properties complete attach as many schedule E as are needed to separately list all the properties so if we look at the schedule E the trustee schedule E over here and then we've got these property names ABC that we can list out the different properties if we have more than three then you're going to need more than one schedule E in order to list out the properties over three that that you have so however fill in lines 23 through 26 on only only one schedule E so when we get down to the bottom line here on the one schedule E we start to combine things together because you would think if they all qualify on the schedule E kind of calculations that we could basically combine our total schedule E incomes possibly for use of passive act to try to figure out any kind of limitations we have passive activity rules loss limitations and so on and so forth so we can kind of combine them together at the bottom of the one schedule E for that calculation that would be the general idea so the figures on line 23 a through 26 on the schedule E should be the combined totals for all properties reported on your schedule E on schedule E page one line 18 enter the depreciation you are claiming for each property you may also need to attach form 4562 to claim some or all your depreciation C form 4562 later so we're looking at the depreciation line here depreciation boom form 4562 depreciation and amortization may be necessary for the added detail related to it you can put that together in accordance and tax software of course helps us with that schedule E continued if you have a loss from your rental real estate activity you may also need to complete one or both of the following forms forms 6198 at risk limitations see at risk limitations later also see publication 925 form 8582 passive activity loss limitations see passive activity loss limitations later so if we jump on over to the schedule E here and we have a loss we've got a huge expense here and so we've got a loss then that loss that's when the limitations might be applied to it and you can look at some of these other schedules that could be applied included the passive activity loss to form 8582 and here's form 6198 at risk limitations so then page two of schedule E is used to report income or loss from partnerships as corporations estates trusts and real estate mortgage investment conduits if you need to use page two of schedule E and you have more than three rental or royalty properties be sure to use page two of the same schedule E you use to enter the combined totals for your rental activity on page one so I also include the amount from line 26 part one in the total income or loss online 41 part five so schedule E form 1040 we've got the form 4562 you must complete and attach form 4562 if you are claiming the following depreciation in your rental activity so form 4562 just to take a look at that 4562 over here is the depreciation and amortization we looked a little bit at the depreciation schedules in prior presentations so then we've got depreciation including the special depreciation allowance on property placed in service during 2021 depreciation unlisted prosperity such as a car regardless of when it was placed in service otherwise figure your depreciation on your own worksheet which is basically those other worksheets typically you're going to be using your software to help you out with those worksheets too you don't have to attach these these computations to your return but you should keep them in your records for future reference so they might not be an official form when we're actually looking at the worksheets for the depreciation calculations but they're going to be critical and we're going to want those supporting schedules in place in the event that there's questions about one of the most complex calculations we're doing here that being the depreciation so you may also need to attach form 4562 if you are claiming a section 179 deduction that's kind of an accelerated depreciation type of calculation where you get more depreciation up from amortizing costs that begin during 2021 or claiming any other deduction for a vehicle including standard mileage rate or lease expenses see publication 946 for information on preparing form 4562 schedule c form 1040 profit or loss from business so schedule c isn't what we normally think of with the rental activity but again you could have some instances when in essence it qualifies as more of a normal kind of business as opposed to the rental activities reported on schedule c's and we had all the differences that comes in play when we're thinking about a schedule c type of situation versus a schedule e even though they're both basically income statement type of schedules so generally the schedule c is used when you provide substantial services in conjunction with property or the rental in part of a trade or business as real estate dealer so now you're you're moving over to a schedule c situation again that means that you're going to have to deal with self-employment tax most likely you got that business deduction involved and so on and so forth but you might not have as stringent kind of situations with regards to the the loss limitations or the passive activity kind of stuff because you're active in the schedule c more specifically you would think is the general the general assumption providing substantial services so what does that mean if you provide substantial services that are primarily for your tenants convenience such as regular cleaning changing linen or made services you report your rental income and expenses on schedule c so you're acting more kind of like a hotel kind of situation as opposed to just providing a place for someone to rent and then just kind of keeping up with that place but not you're not really doing you know the day-to-day services on it you know like changing the sheets and whatnot but you might you might fix the the roof if it was leaking for example if it was a rental so so use form 1065 us return a partnership income if your rental activity is a partnership so if it's a partnership of course then you use the partnership form to do that so you can allocate then the income from the partnership 1065 form to the individual owners more than one of them two or more owners that would then flow through with a K1 to the forums 1040s so including a partnership with your spouse unless it is a qualified rent joint venture now when you get to a partnership situation with your spouse it gets a little bit confusing on it because you got to think about well now you got two people that are involved in this venture but they're really taxed as one person basically for federal income taxes but you still kind of have to break them out as two people at least for the allocation of the self-employment tax which is going to be applicable to the schedule c business because now you got the self-employment tax which is basically applied per person and so you got to figure out some way how are you going to treat with the partnership that is a a marital couple so in any case substantial we talked more about that when we talked about the schedule c business in general different options for a marital couple on it we might look at it a little bit more in depth here but substantial services don't include the furnishing of heat and light cleaning of public areas trash collection etc for more information about that you can see publication 334 tax guide for small business also you may have to have to pay self-employment tax on your rental income using schedule se form 1040 well that's no good why do i have to do that i don't want to do that yeah that's that's what happens when it's a schedule c but in any case self-employment tax for discussion of substantial services see real estate rents in chapter five of publication 334 qualified joint venture so if you and your spouse each materially participate see marital participation under passive activity limits later as the only members of a jointly owned and operated real estate business and you file a joint return for the tax year you can make a joint election to be treated as qualified joint venture instead of a partnership now that could be easier to do because if you do a partnership then you got to file a separate tax return and then have the k ones to flow through that's generally going to cost more and be more of a problem or a pain if you can have a qualified joint venture possibly that would be an easier type of thing to deal with this election in most cases won't increase the total tax owed on the joint return but it does give each of you credit for social security earnings on which retirement benefits are based and Medicare coverage is your rental income is subject to self-employment tax so if it's reported on the schedule see it might be subject to the self-employment tax that's usually what that's kind of where we get this the the problem that would be involved in there because you got to allocate the self-employment tax to the proper spouse so that they get the proper coverage for the benefits that they'll be receiving at the retirement time when they're going to be receiving benefits so if you make this election you must report rental real estate income on schedule e or schedule c if you provide substantial services you won't be required to file form 1065 the partnership return for any any year the election is in effect rental real estate and income generally isn't included in net earnings from self-employment subject to self-employment tax and is generally subject and is generally subject to the passive activity limits so if you and your spouse filed a form 1065 for the year prior to the election the partnership terminates at the end of the tax year immediately preceding the year the election takes effect so so for more information on qualified joint ventures you can go to the irs.gov website qualify joint ventures q j v